KAUTILYA ON THE SCOPE AND METHODOLOGY OF ACCOUNTING, ORGANIZATIONAL DESIGN AND THE ROLE OF ETHICS IN ANCIENT INDIA

Accounting Historians Journal, The, Dec 2004 by Sihag, Balbir S

KAUTILYA ON CREATING THE NECESSARY CONDITIONS FOR REDUCING FRAUD

The ruler should avoid appointing persons who are fraudulent, dishonest, cruel, without enthusiasm, incompetent and cowardly [Kautilya's Rajanitisastra, Subramanian, p. 128].

Kautilya believed that prosperity requires the creation of wealth both in the private and public sectors. He suggested many economic policies to encourage the creation of wealth in the private sector. He also advocated minimizing government spending on administration in order to generate the maximum surplus for building the necessary public infrastructure. Additionally, in his scheme, some enterprises, such as, liquor sales and gambling, were to be managed by the government. Kautilya prescribed that each public enterprise be required to generate a maximum amount of profit without crossing ethical bounds. Therefore, accurate measurement of the economic performance of a public enterprise and the elimination of opportunities for misappropriation of public funds by government employees was deemed absolutely critical. For these reasons, adoption of an appropriate format for bookkeeping and codification, and compliance with financial rules could not be left to the discretion of individual enterprises. Kautilya attempted to develop solutions to mitigate such problems through uniform bookkeeping rules for recording data systematically and by advocating frequent periodic reporting and the adoption of independent audits to reduce system failures. He suggested incentive-based compensation mechanisms to reduce what we now recognize as moral hazard problems. As noted below, the Comptroller-Auditor (one official), who was ultimately responsible for financial matters, was required to be knowledgeable, efficient and incorruptible.

Kautilya realized that the fiscal health of the Treasury depended not only on developing an economically sound policy that increased the taxable capacity of the economy through economic development, but also on honest and efficient financial management. He was quite concerned about the possibility of fraudulent accounting by government servants. He listed 40 possible ways in which corrupt employees could cheat and considered that it was not easy to detect cheating. He [p. 281] stated, "Just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money [2.9]." He [p. 283] continued, "It is possible to know even the path of birds flying in the sky but not the ways of government servants who hide their (dishonest) income." Kautilya's primary goal was to minimize the scope of such eventualities.

He provided insights to possible inadvertent as well as deliberate accounting errors or irregularities, which decreased the revenue of public enterprises. He believed that revenue losses could be caused by system failures and moral failures. Accordingly, he identified the potential sources of such losses as: inadvertent recording errors, deliberately deceptive accounting, collusion among employees to misappropriate revenue, loss in productivity due to in-fighting among employees; and most importantly, he observed that principles are only as good as the people who practiced them.